ECB Sees Upside Risks To Price Stability

4/12/2012 7:08 AM ET

The European Central Bank said that inflation in Eurozone is subject to upside risks and it is ready with all the tools necessary to address them "in a firm and timely manner."

Inflation in the 17-nation economy is expected to stay above 2 percent in 2012, with upside risks prevailing, the ECB said in its monthly bulletin, echoing the comments made by President Mario Draghi at last week's post-policy meeting press conference.

The central bank reiterated that all the non-standard monetary policy measures are temporary in nature and that all the necessary tools are available to address upside risks to medium-term price stability in a firm and timely manner.

After the policy meeting last week, Draghi said any talk of an exit strategy regarding monetary policy in the euro area is "premature" despite upside risks to inflation.

Policymakers led by the German Bundesbank have raised concerns recently over ECB liquidity injections stoking inflation.

The ECB report noted that annual inflation rates should fall below 2 percent again in early 2013. The bank said it will pay particular attention to any signs of pass-through from higher energy prices to wages, profits and general price-setting.

However, a combination of modest growth and well-anchored long-term inflation expectations is expected to contribute to only limited underlying price pressures.

Over the policy-relevant horizon, the ECB forecasts price developments to remain in line with price stability. A gradual economic recovery is expected in the course of the year. However, the outlook remains "subject to downside risks," the bank said.

The standard and non-standard monetary policy measures implemented over the last few years has stabilized the financial environment and improved the transmission of monetary policy, the bank noted, while stressing on the need for careful monitoring of further developments.

ECB also reiterated the need for governments to restore sound fiscal positions and implement strong structural reforms to support confidence, sustainable growth and employment in the midst of an uncertain financial environment.

During this month's meeting, the central bank kept interest rates unchanged at a record low for the fourth month in a row as the region's economy is likely to have entered a recession in the first quarter amid lingering concerns over the sovereign debt crisis.

The central bank had reduced the rate in November and December, reversing the two hikes undertaken earlier last year. The euro area economy shrunk 0.3 percent in the fourth quarter of 2011, marking the first contraction since the second quarter of 2009.